Regional Greenhouse Gas Initiative (RGGI)

Summary

The Regional Greenhouse Gas Initiative (RGGI) was the first mandatory cap-and-trade program in the United States to limit carbon dioxide (CO2) from the power sector. It consists of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. RGGI was established in 2005, and administered its first auction of CO2emissions allowances in 2008. By 2020, the RGGI CO2 cap is projected to contribute to a 45 percent reduction in the region’s annual power-sector CO2 emissions from 2005 levels, or between 80 and 90 million short tons (tons) of CO2. RGGI requires fossil fuel power plants over 25 megawatts in participating states to obtain an allowance for each ton of CO2 emitted annually. Power plants within the region may comply with the cap by purchasing allowances from quarterly auctions, other generators within the region, or offset projects.

Page Contents

Cap and Trade Basics

A cap-and-trade system is one of a variety of market-based policy tools being used to reduce greenhouse gas emissions. Market-based policies are often favored as a more cost-effective alternative to traditional command-and-control regulation. A cap-and-trade program sets a clear limit on greenhouse gas emissions and translates this limit into tradable emission allowances (each allowance is typically equivalent to one ton of CO2), which are auctioned or allocated to regulated emitters. At the end of each compliance period, each regulated emitter must submit to the state enough allowances to cover its actual emissions during the compliance period. The total number of allowances minted by the state, the cap, for a given year decreases over time to reduce the total amount of greenhouse gas emissions. By creating a market and a price for emission reductions, the cap-and-trade system offers an environmentally effective and economically efficient response to climate change.

RGGI History

Program Development and Model Rule

In 2005, the governors of Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, and Vermont signed a Memorandum of Understanding[2] (MOU) memorializing an agreement to reduce CO2 emissions within the northeastern and mid-Atlantic region. In 2007, RGGI was expanded to include Maryland, Massachusetts, and Rhode Island. The ten signatory states agreed to be jointly responsible for carrying out the provisions featured in the MOU.

In doing so, the ten states addressed two key components that led to the ultimate implementation of the RGGI program. First, the states agreed to adopt individual shares of the overall RGGI CO2 cap by agreeing to implement state-level CO2 emissions budgets specified in the MOU. Second, the states assumed responsibility for developing a Model Rule[5] to serve as a common framework for individual state-level regulations. The ten signatory states jointly released the first Model Rule draft in 2006, and adopted a final version of the Model Rule on December 31, 2008.

The program’s compliance obligations began on January 1, 2009. Participating states agreed at the time of the program’s inception in 2005 to conduct a comprehensive two-year Program Review throughout 2012. The Program Review was intended to evaluate the effectiveness of the original Model Rule in reducing the region’s CO2 emissions, as well as the extent to which the program enabled states to invest auction revenues into the region’s consumer benefit programs.

Between 2008 and 2013, RGGI operated on the basis of the original Model Rule[6], which served as a regulatory blueprint for each member state. Under the Model Rule framework, each member state enacted individual regulations that covered entities were required to comply with in order to participate in the regional trading program, which featured a regional CO2 cap of 188 million tons between 2008 and 2011, and was lowered to 165 million tons between 2012 and 2013. The Model Rule identified methods and standards for administering quarterly CO2 allowance auctions, and also introduced parameters for monitoring and tracking acquisition and transfers of CO2 allowances between compliance entities through the RGGI CO2 Allowance Tracking System (RGGI COATS[7]).The original Model Rule also established conditions for verifying the eligibility of offset credits.

First Control Period (2009-2011)

Throughout the first control period between 2009 and 2011, when the allowance submission requirement became effective, RGGI auctioned 395 million CO2 allowances, or 70 percent of the total 564 million available during the program’s first three years. Over the course of the program’s first fourteen quarterly auctions, the clearing price for CO2 allowances ranged as high as $3.35 and as low as $1.86. The first control period yielded over $922 million in revenue from auctions. Throughout this period, the RGGI program covered 211 CO2 emissions sources. However, CO2 emissions in the region fell below the cap during the first control period, leaving a surplus of unsold CO2 allowances. A report [10]issued by the New York State Energy Research and Development Agency attributes the region's decrease in CO2 emissions to fuel-switching from petroleum and coal generation to less carbon-intensive natural gas generation, lower demand-side electricity load, and increased nuclear and renewable capacity.

At the end of the first control period, New Jersey Governor Chris Christie announced that the state was withdrawing from RGGI. In withdrawing from RGGI, the governor cited that the state’s CO2 emissions were already below its 2020 emissions targets in part due to the increased use of natural gas, and also suggested that increased operational costs to power plants in New Jersey could provide out-of-state generators with a competitive advantage in supplying cheaper, more carbon-intensive power to the states ratepayer. According to a report[11] issued by the Analysis Group in 2011, revenues generated during the first control period contributed to $1.1 billion in electricity bill reduction for customers in the RGGI region as a result of substantial state investment of allowance proceeds in energy efficiency programs. The report also determined that lower demand for fossil fuels supplied from outside the RGGI region preserved $765 million in the local economy.

Program Review

Member state agencies and stakeholder groups began compiling comments and analyses in 2011 to develop the RGGI Program Review[12], as required by the RGGI MOU. Because of both the increased use of natural gas and the lower demand for electricity by the region’s consumers, the Program Review strongly recommended that the RGGI CO2 cap be reduced. The Program Review culminated with the release of the updated Model Rule[13] on February 7, 2013. The updated Model Rule incorporated feedback from participating state agencies and other stakeholders on regulatory adjustments, with an emphasis on increasing compliance flexibility.

Second Control Period (2012-2014)

Following the departure of New Jersey, the RGGI CO2 cap was reduced to 165 million tons of CO2 at the beginning of the second control period in 2012. As illustrated in Figure 5, demand for allowances throughout 2012 remained low, with prices never exceeding $1.93. Demand for allowances, however, increased dramatically upon release of the updated Model Rule, which lowered the 2014 CO2 budget to 91 million tons. As a result, clearing prices rose as high as $3.21 during auction, with 100 percent of allowances selling following news of the reduced 2014 cap. Between 2012 and 2013, nearly 80 percent of allowances offered at auction were sold.

Updated Model Rule Details

Starting January 1, 2014, member states will begin implementing rules contained in an updated Model Rule[13], which was adopted in late 2013. The 2014 emissions cap of 91 million tons of CO2 represents a 45 percent reduction from the 2013 cap of 145 million tons of CO2. The cap will further decline 2.5 percent annually until 2020, resulting in a cumulative 15 percent reduction of annual emissions from the 2014 cap of 91 million tons of CO2. Under the updated Model Rule, CO2 allowances acquired by compliance entities before 2014 that are already contained in private holding accounts may be used to satisfy an allowance obligation. According to projections[15], RGGI estimates some 115 million allowances allocated before 2014 have been banked in private holding accounts. To ensure the annual target is met with real reductions rather than with the use of banked allowances, RGGI will reduce the cap each year by a factor that accounts for previously banked allowances

In addition to reducing the cap, the updated Model Rule introduces a few new policy provisions[18]. One of these is the Cost Containment Reserve (CCR), intended to keep the price of allowances from rising above a program-wide trigger price. The CCR consists of a limited supply of additional CO2 emission allowances separate from the annual RGGI Program CO2 Budget, which are to be made available for purchase when demand for allowances causes the clearing price to exceed the trigger price during a quarterly auction. The CCR is intended to provide some assurance that the auction price will not rise above the CCR trigger price, which changes annually to prices determined during the Program Review process.

The updated Model Rule also adjusts the schedule for demonstrating compliance by introducing a two-year interim control period beginning in 2015. Previously, regulate entities only had to demonstrate compliance at the end of each three-year control period. The interim control period runs throughout the first and second calendar years of each control period, and requires compliance entities to hold allowances equal to 50 percent of their obligation over the two-year interim control period, before submitting 100 percent of the compliance obligation at the end of the three-year control period. The interim control period is intended to prevent regulated entities from using impending bankruptcy to avoid any compliance obligation. Additional details of the updated Model Rule are summarized in Table 1.

Table 1: RGGI Cap-and-Trade Details

Issue

Details and Discussion

Status of Regulation

Legal Status

Each participating state passed regulations and/or statutes based on the Model Rule framework. Program compliance began on January 1, 2009.

Legal Authority

Regulations in each member state[19] dictate compliance standards as enforced by RGGI member state environmental agencies.

Starting in 2014, the CCR will contain a limited number of allowances each year. These allowances will be made available during any auction in which demand for allowances at prices at or above the CCR trigger price otherwise exceeds the supply of CO2 allowances available for sale at that auction. The CCR will contain the number of allowances specified below for each year, regardless of whether CCR allowances were sold in previous years. It is possible for the clearing price to exceed the trigger price if the demand for allowances at the trigger price exceeds the total number of available allowances when the CCR is included.

Year

Allowances in RGGI CCR (Millions)

CCR Trigger Price

2014

5

$4

2015

10

$6

2016

10

$8

2017

10

$10

2018

10

$10.25

2019

10

$10.50

2020

10

$10.75

Emissions Reporting and Verification

Reporting

Compliance entities must report CO2 emissions quarterly to RGGI member state environmental agencies, as well as the EPA’s Clean Air Markets Division (the latter required by federal law of all large greenhouse gas emitters nationwide).

Registration

Compliance entities must register with RGGI on the RGGI CO2 Allowance Tracking System (RGGI COATS).

Verification

Member states’ environmental agencies must provide allowance verification, as well as additional third-party verification for all CO2 offset allowances.

Compliance and Enforcement

Annual Obligation

Compliance entities must hold 50% of their allowance obligation at the end of each Interim Control Period, which includes any year that is not the end of a three-year compliance period.

Compliance Period Obligation

RGGI uses three-year control periods to manage compliance. The first two calendar years of each three-year compliance period constitute the Interim Control Period. During the interim control period, compliance entities are required to hold 50% of their total allowance obligation in their compliance account. Entities may also choose to submit these allowances during the interim control period to be deducted from the total number of allowances needed to achieve compliance at the end of the three-year control period.

Noncompliance

Firms failing to submit CO2 allowances equal to annual CO2 emissions may incur a fine equal to three times the allowance price for each ton of CO2 emissions exceeding the number of submitted allowances. Additional penalties will be incurred by sources failing to hold allowances accounting for the 50% compliance obligation during an Interim Control Period. Member state agencies may impose state-specific penalties on firms failing to comply with CO2 allowance obligations.

Trading and Enforcement

An independent market monitor oversees the market to detect attempts of price manipulation or collusion during auctions and exchanges on secondary markets. Participants found in violation are subject to civil or criminal penalties imposed by Title V of the Clean Air Act[20].

Auction Revenue

Since 2008, RGGI allowance auctions have generated roughly $1.5 billion in cumulative auction proceeds. Member states have agreed under the RGGI MOU to direct at least 25 percent of all revenues generated[21] at auction to consumer benefit, renewable energy, or energy efficiency programs. Based on an investment report[22] released by RGGI in 2012, member state reinvestment totaled over $617 million between 2009 and 2011, with nearly 71 percent of cumulative reinvestment directed at renewable energy and energy efficiency initiatives across the RGGI region. The report credited these clean energy and efficiency programs with returning $1.3 billion in lifetime energy savings to the region's ratepayers, as well as reducing CO2 emissions in the region by 12 million tons.The report also attributed over $69 million in funding for direct bill assistance programs for low-income families throughout the region.

Glossary

Allowance: A government-issued authorization to emit a certain amount. In greenhouse gas markets, an allowance is commonly denominated as one ton of CO2e per year. The total number of allowances distributed to all entities in a cap-and-trade system is determined by the size of the overall cap on emissions.

Allowance distribution: The process by which emissions allowances are initially distributed under an emissions cap-and-trade system. Authorizations to emit can initially be distributed in a number of ways, either through some form of auction, free allocation, or some of both.

Auctioning: A method for distributing emission allowances in a cap-and-trade system whereby allowances are sold to the highest bidder. This method of distribution may be combined with other forms of allowance distribution.

Banking: The carry-over of unused allowances or offset credits from one compliance period to the next.

Borrowing: A mechanism under a cap-and-trade program that allows covered entities to use allowances designated for a future compliance period to meet the requirements of the current compliance period. Borrowing may entail penalties to reflect a programmatic preference for near-term emissions reductions.

Business-as-Usual: In the absence of the regulation being discussed. This term is used to assess the future impacts of a regulation.

Cap and Trade: A cap-and-trade system sets an overall limit on emissions, requires entities subject to the system to hold sufficient allowances to cover their emissions, and provides broad flexibility in the means of compliance. Entities can comply by undertaking emission reduction projects at their covered facilities and/or by purchasing emission allowances (or credits) from the government or from other entities that have generated emission reductions in excess of their compliance obligations.

Compliance period: The time frame for which regulated emitters surrender enough allowances to cover their actual emissions during that time frame.

Credits: Credits can be distributed by the government for emission reductions achieved by offset projects or by achieving environmental performance beyond a regulatory standard.

Emissions Cap: A mandated constraint in a scheduled timeframe that puts a “ceiling” on the total amount of anthropogenic greenhouse gas emissions that can be released into the atmosphere.

Emissions Trading: The process or policy that allows the buying and selling of credits or allowances created under an emissions cap.

Greenhouse Gases (GHG): Greenhouse gases include a wide variety of gases that trap heat near the Earth’s surface, slowing its escape into space. Greenhouse gases include carbon dioxide, methane, nitrous oxide and water vapor and other gases. While greenhouse gases occur naturally in the atmosphere, human activities also result in additional greenhouse gas emissions. Humans have also manufactured some greenhouse gases not found in nature (e.g., hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride).

Offset: Projects undertaken outside the coverage of a mandatory emissions reduction system for which the ownership of verifiable greenhouse gas emission reductions can be transferred and used by a regulated source to meet its emissions reduction obligation. If offsets are allowed in a cap and trade program, credits would be granted to an uncapped source for the net emissions reductions a project achieves. A capped source could then acquire these credits as a method of compliance under a cap.

Price Trigger: A general term used to describe a price at which some measure will be taken to stabilize or lower allowance prices. For example, through 2013 RGGI used price triggers to expand the amount of offsets that could be used for compliance.

Program Review (RGGI): The Memorandum of Understanding among RGGI states calls for a 2012 Program Review. This Program Review, now complete, was a comprehensive evaluation of program success, program impacts, additional reductions, imports and emissions leakage, and offsets.

Scope: The coverage of a cap-and-trade system, i.e., which sectors or emissions sources will be included.

Sealed Bid (Auction): A type of auction process in which all bidders simultaneously submit sealed bids to the auctioneer, so that no bidder knows how much the other auction participants have bid.

Single Round (Auction): Bids for allowances are all solicited and settled in a single round. Auction participants can submit multiple bids for this single round. For example, a participant could bid $15 per allowance for 10,000 allowances and $20 per allowance for a separate 20,000 allowances.

Source: Any process or activity that results in the net release of greenhouse gases, aerosols, or precursors of greenhouse gases into the atmosphere.

True-up: A submission of emission allowances equivalent to a regulated entity’s emissions during a compliance period, less what the entity has already submitted at interim deadlines.

Uniform Price (Auction): All allowances awarded in a single auction will be the same price. Allowances will be sold to bidders, beginning with the highest bid price and moving to successively lower priced bids, until all of the available allowances are sold. The bid at which all available allowances are sold becomes the settlement price and this is the price per allowance that all bidders will be charged for the allowances won in the auction. Bids submitted at prices below the settlement price will not win any allowances.

Environemental Law Reporter page[33] on Thrun v. Cuomo. The suit was filed by members of Americans for Prosperity against New York State Governor Andrew Cuomo, the New York State Department of Environmental Conservation, and the New York State Energy Research and Development Authority. The suit alleged that RGGI was established out of improper legislative procedure, and further argued that the program was an indirect tax on the state's electricity ratepayers. The suit was ultimately dismissed by a New York State judge on the grounds that the plaintiffs failed to exhibit sufficient standing.

Information on RGGI allowance futures[34] and options[35] contracts on New York Mercantile Exchange.